How Much Risk Is Too Much?

June 15, 2004

We keep hearing that the eyes of Wall Street are on Connecticut. Or, more specifically, they're on a Superior Court room in Rockville, where state officials are duking it out with the barons of the financial services industry.

At stake is the reputation of Forstmann Little & Co., a private equity investment company, and about $125 million in Connecticut pension fund investments.

Although the lawsuit filed by Connecticut is grounded in the vocabulary and technical jargon of the world of high finance, state officials say the issue is very simple: The state pension fund and its 165,000 beneficiaries were duped by an unscrupulous company that engaged in overly risky and unauthorized activities.

``You don't have to be an expert to understand what Forstmann Little did,'' said state Treasurer Denise Nappier, who filed suit along with Attorney General Richard Blumenthal. ``Forstmann Little cheated Connecticut workers and retirees of their hard-earned pension money.''

The two officials claim that the firm breached both its contractual obligations and its fiduciary responsibilities and violated securities law. How so? The firm sunk $95 million of Connecticut pension money in XO Communications and $31 million in McLeodUSA. The two foundering telecommunications companies later filed for bankruptcy, rendering the investments just about worthless.

Ms. Nappier and Mr. Blumenthal say the contract with Forstmann Little precluded the firm from investing large sums of money in any one venture, particularly a highly speculative one. Moreover, Forstmann Little is said to have misled, misrepresented and concealed information regarding the nature of the investments.

Naturally, the company disagrees. Forstmann Little officials say Ms. Nappier and Mr. Blumenthal are looking for a scapegoat for a deal gone bad. Sometimes investments pan out and sometimes they don't. In this case, they didn't. C'est la vie.

This lawsuit is expected to drag out over the course of the summer. Though the outcome is unclear, one thing seems certain: If Connecticut prevails, a flood of suits will be unleashed by shareholders unhappy about their losses. No wonder the financial services world is eyeing little Rockville.